Fund Baby | Saving for College with the 529 Plan

Updated: Aug 18, 2020


The rising cost of college....


Millennials are well acquainted with the phrase. It frequents news programs and headlines. For many, it’s much more than a hypothetical concern. Millions are deeply familiar with the monthly pang that reverberates throughout their homes as the student loan payment exits their checking accounts. It hurts. Especially if you consider how much of the payment goes towards interest. Ouch. Still, before you decide to forego higher education entirely, let’s examine the dilemma holistically. 

Statistically, college graduates make more money over a lifetime, which arguably contributes to a better quality of life. If you want to find yourself on the road to success, a college education may be the appropriate avenue. Only you can decide if the benefits outweigh the costs.

For the sake of this article, let’s assume you are pro-college, and want your children to matriculate. So, have you planned for the costs accordingly? Hours are spent on college entrance exam preparation, but that is only one piece of the equation. These classes may help grant your kids access, but what happens when the first tuition bill arrives?

It may be too late for Millennials, but it’s not too late for your children. While experience is undoubtedly the best teacher, it does not have to be the personal experience of your kids. Learn from your mistakes, and give them a head start by planning for your children’s collegiate expenses early. 


Allow me to introduce the 529 Plan


The 529 Plan is a college savings program with specific tax and financial aid benefits. Generally, there are two 529 plan options: prepaid tuition or college savings. Most states offer some configuration of the 529 plan, and you can work with a plan advisor to help choose the best option for your goals. Earnings in a 529 plan grow federally-tax free and are not taxed when the money is withdrawn to pay for college expenses.  


Let’s examine your options. 


College Savings Plan

This plan functions much like a Roth 401(k) or Roth IRA, meaning you invest after-tax contributions in mutual funds or similar investments. The value of the account will fluctuate with the success of the market, and will be subject to ebbs and flows. 

Prepaid Tuition Plan

This option is relatively self explanatory. Essentially, you pay all, or parts, of in-state, public college education costs. This sum can also be used at private institutions if your child opts for a private school.


If you begin planning early, when your children are still babies, you’ll have the benefit of time on your side.


If you begin planning early, when your children are still babies, you’ll have the benefit of time on your side. Seem like overkill? Let’s examine the value of your dollar invested over 20 years versus the cost of a typical student loan on a 10 year repayment plan. 

For the sake of this calculation, let’s assume the following:

Annual cost of college: $25,000

Age of child when contributions begin: 0 (first year of life)

College cost inflation rate: 4%

Loan interest rate: 6%

Investment return rate: 6%

Loan length: 10 years

Based on the current average cost of college tuition $25,000, a college inflation rate of 4% and an assumed investment return in your 529 plan of 6%, paying for the entire four-year cost of college would require monthly contributions to your 529 plan of $465 through the end of their fourth year of school. Your total contributions would be $117,228

If you were to borrow the full cost of college, your monthly loan payments (assuming a loan interest rate of 6% and a 10 year repayment period) would be $2,388. Your total loan repayments would equal $286,518. Ouch..

In this scenario, it will cost you $169,290 more to borrow than to save for college.

Do these numbers scare you? They should. Who can afford to pay $2,388 EACH MONTH? That’s the same as a hefty mortgage. Sadly, these numbers are generous. Most student debt holders do not repay their debt in 10 years. Twenty and 30 years repayment plans are much more likely, which only increases the total amount they pay over time.

On the flipside, a $465 monthly contribution into a 529 plan investment account may also seem exorbitant, especially when your child is an infant. However, even if you only contribute half of that sum, you’re rewarding your child with an enormous head start.  


Most 529 plans require a minimum monthly payment


While most 529 plans require a minimum monthly payment, it does not have to be wildly expensive. Some plans allow you to contribute as little as $25 per month, and make lump sum deposits around birthdays or holidays. Encourage family members to give cash as gifts, so they can also invest in your child’s future. Just don’t forget to deposit the gift appropriately!

Encourage family members to give cash as gifts, so they can also invest in your child’s future

For many of the Common Cents Crew the first few years post college were financially tight. We didn’t earn much, and our college debt felt like an albatross around the neck. We wish someone had had the foresight to invest in our futures with a 529 plan. 

Ca$hing in on change,

The Common Cents Crew

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